How to protect client interests during a business sale

Selling a business involves releasing sensitive commercial information, potentially to rivals seeking to use it for their own benefit. Protecting client interests, therefore, is important in the selling process and can be achieved through careful marketing and the use of confidentiality agreements.

Discreet marketing and non-disclosure agreements (NDAs) help to ensure that client information remains safe and only falls into the hands of those with a legitimate interest in the business for sale, writes Paul Williamson of Selling My Business, a business sale expert.

What is discreet marketing?

Along with NDAs, discreet marketing safeguards clients from unscrupulous business rivals. It also helps to keep the sale private from employees and other stakeholders, such as suppliers.

This is important because if knowledge of the business sale becomes widespread, members of staff might feel concerned about the change of employer, or potential changes to their role within the firm.

Suppliers could also hold negative views of a potential sale and demand changes to existing contract terms and conditions to protect their own business position. So what does discreet marketing of a business mean in practical terms?

How can a business be marketed discreetly?

A discreet business sale may seem difficult to achieve given that interested parties do require sensitive information. By using detailed non-disclosure agreements that cover all the business areas required, however, the risks are reduced.

Confidentiality is typically high on the list of priorities when a business goes on the market, but by marketing it discreetly and using non-disclosure agreements, it is possible to control access to and the use of sensitive information.

Selling discreetly maintains privacy around the asking price, which could benefit upward negotiations. Discreet marketing strategies typically also include non-disclosure agreements, which act as a deterrent against malicious use of the information provided.

Using non-disclosure agreements in a business sale

The sales memorandum released during the initial stages of the selling process includes general data and financial information about the business. Once interested parties start to make enquiries an NDA offers protection for the client’s data.

An NDA is a legal document that threatens court action for non-compliance and clearly states the terms under which interested parties can view the information. They must sign the NDA before they can receive a memorandum of sale, which helps the client to control the process.

What is included in an NDA?

The parties to the agreement

The client and the party interested in the business sale both sign the NDA.

The information that must remain confidential

This might include:

•             financial data

•             information on suppliers, employees, and customers

•             new product details

•             databases

•             business strategies and plans

•             research and development data

•             new technologies

•             trade secrets

How long the information must remain confidential

Non-disclosure agreements might specify an expiry date of the contract – for example, five years – but can also state that some information must remain confidential indefinitely, such as trade secrets.

The purpose of providing the information

Use of the information should be restricted to the permitted purpose only, i.e. to sell the business, in this scenario.

Permitted use of the information

In the case of selling a business, permitted use will be for the third party to assess the business proposition.

Who the information can be shared with

An interested party to a business sale is likely to share the information provided with professional advisors – typically their accountant and solicitor.

How non-disclosure agreements protect client interests

NDAs safeguard client commercial information at various stages of the sales process. A third party may withdraw their interest after viewing the sales memorandum, for example, but without an NDA in place could make it known that the business is for sale.

This could have a destabilising effect on day-to-day operations and unsettle employees if they become aware. They could also use the information in the memorandum for their commercial benefit as a competitor business.

The negotiation stage is another key step in the sales process and the NDA protects sensitive data from misuse if the client decides to cease negotiations with a prospective buyer.

Careful marketing and the NDA deterrent

A combination of discreet marketing and the deterrent provided by a non-disclosure agreement protects client interests when they are selling their business. It is vital to prevent sensitive information from being released, whether negligently or with malicious intent by a competitor.

Confidentiality is a key issue that can help clients achieve their main objectives from a business sale, such as securing the highest price, the best overall terms, or a speedy sale transaction.

Being proactive in drafting a comprehensive NDA tailored to the client prevents the disclosure of sensitive information and the damaging consequences of it being in the public domain or the hands of competitor businesses.